The 0.50% rate rise ‘disease’ has spread to New Zealand from US financial markets which have bullied the Federal Reserve into a commitment for larger than expected increases in its key rate.
Even though the Fed doesn’t meet until early May, it is generally accepted the Federal Funds rate will rise 0.50% to 0.75% (after the 0.25% rate rise in March), with at least three further increases to get the indicator back to 2% as quickly as possible by the end of this year.
But way down in Kiwiland, where they have always been an early adopter when it comes to monetary policy (the first to really grab inflation targeting back in the early 1990’s), the Reserve Bank of NZ went all hairy-chested yesterday and bumped its Official Cash Rate up to 1.50% from the 1% rate set in February when the rise was 0.25%.
So standby for the chorus of monetary policy sparrows in Australia to urge similar sized rises for Australia when the RBA starts its rate rises – June is the market bet at the moment (because it is after the election campaign).
They will ignore the difference in inflation rates – in the year to December our Consumer Price Index was up 3.5%, NZ’s CPI was 5.9%, the highest since 19990. (The UK reported a 7% consumer price inflation rate after the US’s 8.5% CPI reading on Tuesday).
The Australian March quarter CPI is out on April 27 and will be more than 4%. NZ’s is out on April 29 and will be close to 7% because of the surge in petrol prices in both countries.
Oddly, the size of the increase was not mentioned in the release from the RBNZ yesterday – you’d think it would have been worth publicising the size and providing a better explanation that what was in the statement which justified the higher rate along these lines: the bank’s monetary policy committee “agreed it is appropriate to continue to tighten monetary conditions at pace to best maintain price stability and support maximum sustainable employment.”
“They agreed that moving the OCR to a more neutral stance sooner will reduce the risks of rising inflation expectations. A larger move now also provides more policy flexibility ahead in light of the highly uncertain global economic environment.
“The Reserve Bank’s core inflation measures are at or above 3 percent. Inflationary pressure is being further accentuated by current high imported energy and commodity prices, which are lifting headline CPI inflation.
“The Committee will remain focused on ensuring that current high consumer price inflation does not become embedded into longer-term inflation expectations,” the statement concluded.
The sharp rate rise and gung-ho attitude came despite the RBNZ acknowledging that while inflationary pressures globally are still strong with supply chain disruptions still impacting (thanks to Covid and the Russian invasion of Ukraine), “the pace of global economic activity continues to slow”.
“There is an elevated level of uncertainty created by the persistent impacts of COVID-19, and clear signals that monetary and broader financial conditions will tighten over the course of 2022. Added to this is the high level of geopolitical tension and related economic sanctions on Russia.
“In New Zealand, underlying strength remains in the economy, supported by sound balance sheets, continued fiscal support, and strong export earnings. There has been some economic disruption due to the outbreak of Omicron. However, the high vaccination rates across New Zealand are assisting to reduce this disruption.
“Heightened global economic uncertainty and inflation are dampening consumer confidence. The rise in mortgage interest rates – amongst other factors – have acted to reduce mortgage demand and house prices. However, economic capacity pressures remain, with a broad range of indicators highlighting domestic capacity constraints and ongoing inflation pressures. Employment is above its maximum sustainable level and labour shortages are impacting many businesses,” the RBNZ said in the statement.
